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Promises Broken: “Temporary” Taxes Unnecessary

Are new taxes necessary? No – at least not if the history of the temporary taxes is any indication. Yet once a new tax is passed – even a temporary tax – it rarely goes away. In the case of the temporary sales and income taxes, half of the temporary sales tax increase first passed in 2001 has been made permanent. In fact, the General Assembly repeatedly broke its promise to fully repeal the “temporary” sales and income tax rates four times over the past four years. Lawmakers voted to continue at least part of the temporary taxes first in 2003, again in 2005, once more in 2006, and one last time in 2007.

During the period in which the temporary taxes remained in effect, the state collected more than $1 billion in surplus revenue – over and above the $2 billion brought in by extending the taxes beyond their original FY2003-04 expiration date. All told, the state collected more than $3.1 billion in total surplus revenue from FY2003-04 to FY2007-08. Was this revenue necessary? It seems not insofar as during the same period, the state increased spending 39 percent overall, and 27 percent per capita.

What Budget Crisis?

As originally proposed by Governor Mike Easley, the temporary taxes were a temporary response to a short-term budget “crisis” brought on by the 2001 recession. Indeed, the situation was so grave that Governor Easley appeared on statewide television to warn that “the state’s fiscal condition is direr than it has been in decades” and that only a sales tax increase could save us. In response to the emergency, the Democrat-controlled General Assembly agreed to two “temporary” tax increases: a ½ cent increase in the sales tax and a ½ percent increase in the upper bracket income tax.

Of course, the question of there being a “crisis” at all is a matter of perception. It cannot be denied that General Fund revenues decreased in FY2001-02. But in none of these years did the total budget (due to the inclusion of federal dollars) undergo an absolute decline. Thus from FY2000-01 to FY2003-04, the total budget increased from $24.5 billion to $29.4 billion, with no drop off in between. In spite of the economic recession, North Carolina also did not cut back spending very much – thanks, in part, no doubt to the tax increases passed in 2001. Even more telling is that even as the private sector was cutting positions, the state increased its number of employees by 4.1 percent. Meanwhile, private employers cut 163,000 positions – a reduction of 4 percent. Seen from this perspective, the “budget crisis” appears to describe not so much a genuine fiscal crisis as merely a slowing in the rate of growth of the state government.

The Crisis Continues

The so-called temporary taxes proved to be difficult for lawmakers to part with. In 2003 and 2005, legislators voted to extend the temporary taxes. Only in 2006 – just prior to the November elections – did the General Assembly finally allow half (¼ cent) of the temporary sales tax increase to expire. In 2007, legislators permitted the temporary income tax increase to sunset, but made the remaining ¼ cent of the temporary sales tax increase permanent.

Lawmakers who voted to continue the “temporary” taxes defended their votes with outrageous claims that the revenues were necessary to finance even the most basic government services. Representative Alma Adams (D-Guilford) warned that eliminating the temporary taxes “in my opinion, would devastate our state, our state’s economy and our citizens.” Adams continued, “The people of our state have many unmet needs and we’re constantly struggling to keep up with the growth.” Likewise, Representative Jim Crawford (D-Granville) declared that without the temporary tax revenues, “folks will be starving, and won’t have any health care.”

The facts suggest otherwise. Had the temporary taxes expired as scheduled in 2003, lawmakers would still have had more than $2 billion in budget surpluses. The revenues generated by extending the “temporary” taxes thus fueled the expansion of government – rather than merely covering “unmet needs.”

The “temporary” taxes brought in billions of excess revenue

Since the original sunset date of 2003, taxpayers have paid more than $1.46 billion in extra taxes due to the “temporary” sales tax. Add to this another $258.4 million projected for FY2007-08 and the total comes to $1.72 billion in additional temporary sales taxes over four years.

Taxpayers paid another $312 million in additional income taxes thanks to the extension of the “temporary” income tax rate.

In total, lawmakers taxed North Carolina citizens an extra $2.03 billion by extending the “temporary” taxes beyond their originally approved sunset dates.

Spending increases were financed with surplus revenue

Spending increased by 39 percent from FY2003-04 through FY2007-08.

During the same period, the state collected more than $3.1 billion in total surplus revenue.

Conclusion

The “temporary” taxes fueled a significant increase in government spending, extending well beyond any budget “crisis” and into a healthy economic expansion. A look at the data reveals that the “temporary” taxes could have expired as originally promised and state lawmakers still would have enjoyed more than $1 billion in surplus revenues over the last five years. What we need in North Carolina is not new taxes, but better ways of using the money we already have.

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